IMF raises global growth outlook as advanced nations improve

The International Monetary Fund raised its forecast for global growth this year as expansions in the U.S. and U.K. accelerate, and urged advanced economies to maintain monetary accommodation to strengthen the recovery.

The global economy will grow 3.7% this year, compared with an October estimate of 3.6%, the IMF said in revisions to its World Economic Outlook released in Washington today. U.S. gross domestic product will expand 2.8%, compared with 2.6%; Japan will gain 1.7% versus 1.2%; and the U.K. will increase 2.4% from 1.9%, the report showed.

“In advanced economies, output gaps generally remain large and, given the risks, the monetary policy stance should stay accommodative while fiscal consolidation continues,” the Washington-based organization said in the report. “In many emerging market and developing economies, stronger external demand from advanced economies will lift growth, although domestic weaknesses remain a concern.”

Central banks in the U.S., Japan and the euro area face inflation levels under their targets while trying to accelerate growth with policies including benchmark interest rates near zero and bond-buying programs. While it raised the outlook for advanced nations, the IMF said “downside risks remain,” including financial-market volatility in emerging markets.

China’s Slowdown

China, the world’s second-largest economy, is projected to grow 7.5%, faster than the 7.3% seen in October, after 7.7% last year, according to the report.

Olivier Blanchard, the IMF’s chief economist, said in a prepared statement that the fund expects the Federal Reserve’s benchmark interest rate will rise in 2015.

The Fed announced plans last month to taper monthly asset purchases to $75 billion from $85 billion, citing improvement in the labor market.

Among the new risks to advanced economies, the IMF cited “very low inflation,” particularly in the euro area, as becoming more significant and raising the prospect that longer- term inflation expectations could head lower.

“This raises the risks of lower-than-expected inflation, which increases real debt burdens, and of premature real interest rate increases, as monetary policy is constrained in lowering nominal interest rates,” the IMF said in the report. “It also raises the likelihood of deflation in the event of adverse shocks to activity.”